WELLINGTON, New Zealand — The New Zealand government’s annual budget forecasts that inflation will stay high for several years while unemployment increases from a record low, as policy makers grapple with the pandemic’s aftermath and new challenges such as fast-rising interest rates and Russia’s war on Ukraine.
The budget documents released Thursday show that the government expects large financial deficits until 2024 and inflation–which is at its highest in more than three decades–to only return, by a whisker, to the central bank’s 1.0%-3.0% target range in the fiscal year ending mid-2025. Unemployment is projected to rise to 4.8% by the second quarter of 2025 from its current level of near 3.0%.
The New Zealand government’s increased spending in response to COVID-19 was about 20% of gross domestic product, which combined with central bank interest-rate cuts and global shipping disruptions, overheated the economy and fueled inflation.
Russia’s war on Ukraine has added to inflation by disrupting commodity markets such as energy and grains while central banks’ increasingly rapid withdrawal of monetary stimulus has increased the chances of a sharp global economic slowdown.
The government said its borrowing plans will increase by 26 billion New Zealand dollars ($16.37 billion) over four years to NZ$90 billion, though the country’s debt as a proportion of the economy will remain low relative to other wealthy nations.
Part of the increase in borrowing reflects plans to repurchase government bonds that were bought by the Reserve Bank of New Zealand as a way of stimulating the economy during the pandemic. The bonds will be bought back at a rate of NZ$5 billion a year and retired.
Finance Minister Grant Robertson said about NZ$1.05 billion has been earmarked to offset an increased cost of living due to high inflation. About 2.1 million New Zealanders would be eligible for weekly payments for three months from August.